21 Dec 2011

New Global Landscape

Joseph Stiglitz is Professor of Economics and Finance at New York’s Columbia University. The Nobel Prize-winning economist helped create a new branch of economics, "The Economics of Information," exploring the consequences of information asymmetries and pioneering such pivotal concepts as adverse selection and moral hazard, which have now become standard tools for theorists and policy analysts.

Professor Stiglitz will be among several high-profile speakers at the 16-17 January 2012 Asian Financial Forum, to be held in Hong Kong. Organised by the Hong Kong Government and the Hong Kong Trade Development Council, the event will address such issues as global investment prospects, China opportunities, Japan’s reconstruction and green growth initiatives.

Given the ongoing global economic turmoil, is it fair to say that market capitalism now has no answers for developed societies?I think the forces of market capitalism are still very positive when they are directed in the right way. The problem is that markets have to be governed, markets have to be regulated. And in the years before the crisis, the banks, you might say “bought” – through their campaign contributions, lobbying and so forth – deregulation. The wealthy bought a system of taxes that most Americans think is unjustified.

If you can get a market to work in a way it’s supposed to work, then yes, capitalism can actually deliver. But in recent years, capitalism, market economy has not been delivering for most Americans. Just to give you some numbers, the medium-income today is the same as it was in 1997. It has been almost a decade-and-a-half of stagnation. But if you look at a full-time male worker, his income is comparable to what it was in 1978, that is to say, more than three decades of stagnation. Obviously something is not working right, and the benefits of the growth have not been shared to the point where most Americans are actually getting worse off year after year.

A very different model has been followed in China. How would you assess its “report card” after three decades of opening up? Just looking at the numbers, you have to say China has not only managed to grow at an extraordinary rate – close to 10 per cent over 30 years – but at least much, or some of the benefit, has gone to the bottom; hundreds of millions have moved out of poverty. At the same time, one has to recognise there has been growing inequality. The benefits of that growth have not been shared by all citizens in the same way, and that’s going to be one of the real challenges for China as it moves more into a market economy. Market economies often are highly inegalitarian, and one of the frameworks that’s often talked about in China is a harmonious society. How do you reconcile the inequalities that the markets often throw up with creating a harmonious society?

Since China-US ties are fundamental to international trade, how can the two sides avoid continual collisions between their respective economic priorities?One of the challenges for the United States and to some extent, for China, is to come to grips with the new global economic balance in power. In the years after the fall of the Berlin Wall, there was only the dominant economy, which was the United States. Now within a short span of time, China is already the second-largest economy. And the projections are that well within the decade, it would probably be equal in size with the United States; (though) per capita income will still be much lower.

But what that means is that the United States will not be in the kind of position that it was in for a long time to dictate the international rules of the game. The United States will not be in the position to lecture other countries about how they should run their economies. In the aftermath of the great recession, the credibility of the United States giving those lectures is obviously much diminished. So we are going to have a new global landscape. I think it will probably be a good thing for global economic stability and prosperity.

The US introduced the Trans Pacific Partnership (TPP), which brings in eight other countries around the Pacific with Japan, but no China. Can the initiative be successful in this formation?I have a lot of reservations about the TPP, because I have reservations about some of the US “free trade agreements,” as they are called. They are really not free trade agreements. They are managed trade agreements. And they are managed free trade agreements for special interests in the United States. The intellectual property frameworks, for instance, often deny access to medicine to poor people. It’s very important for emerging markets to have access to knowledge, but they often restrain access to knowledge. Many people in academia worry about how our intellectual property regime is actually counterproductive for innovation, for academic development of ideas. So what worries me is that the TPP has been discussed, to a very large extent, in secret without the kind of democratic discussion of the particular provisions. The result is, quite frankly, a lot of anxiety inside the United States, among those who are concerned about issues that I raise, about development, about health, intellectual property, about whether it is going to be a balanced agreement, or one that reflects the special interests of some of our business interests.

Over the long run, the framework that we ought to be going forward on is a multilateral trade framework.I’ve been very concerned about these bilateral or regional trade agreements because, actually, they lead to fragmenting the global trading regime. Economists talk about the extent to which there is trade diversion rather than trade creation. So I would be much happier if we engage in efforts to expand the multilateral framework rather than having one group versus other groups within this global community in the way that the TPP seems to be going.

How do you see Hong Kong’s role in the trade relationships that are emerging?Hong Kong has long been the gateway to China. It’s been an important interface between the mainland and the United States. It’s been a financial centre and I think it would continue to play that role, but obviously in a more complicated way as, for instance, other financial centres develop in China; as other gateways open up. But I think it will continue to be a place where, you might say, the East and the West get together and come to a better understanding of each other.

The theme of this year’s Asian Financial Forum is: “Asia: driving sustainable growth.” To what extent is the Asian growth engine a sustainable one?I think it’s sustainable. Asia has succeeded in creating a strong domestic economy. The middle class, for instance, in both India and China and other countries in Asia, has been growing very rapidly. It is (said that) there are more middle class Chinese now than Americans altogether.

For a long time, China was very dependent on exports, the model was export-led growth, and exports are still going to be important. But there has been a shift away from this dependence on exports. It was the key plank of the 11th Five-Year plan and it has been re-emphasised in the 12th Five-Year plan. And rightly so; I think the global financial crisis of 2008 has really accelerated that movement. There are huge opportunities for the development of domestic demand in China, both for consumption and, perhaps even more importantly, investment, in the cities. People have been moving from rural areas to the cities. But many cities still need large investments to make them more livable – parks, public transportation systems and so forth. So there is a real basis for sustained development in China based on the needs and the resources that China has.